Growing Dividend REITs

Trevor Bond

The torchbearer of separating W. P. Carey into more focused entities, left the company abruptly last week, leaving us with questions about what’s going to be announced in the fourth quarter results next Thursday, Feb. 25. WPC’s CEO, Trevor Bond, stepped down to pursue other interests, according to the company. The stock dropped by 7%, but it has shown signs of recovery.

In the third quarter results, W. P. Carey tested out the possibility of separation of its entities. The separation was given a great amount of attention in the report and even the disclaimer referred to the potential separation. It sounded like the company had already made its decision; it was just testing the waters before sailing ahead

W.P. Carey has a dual structure; besides being an REIT, it also has an investment management branch that oversees publicly-owned, non-listed REITs under the brand, Corporate Property Associates, or CPA®. A rough split of assets under management between REITs and the CPAs is half-and-half. The total AUM is $22 billion.

The company has not mentioned how the split would take place; however, REIT peers that have been both REIT and advisor to other funds have split the REIT from the management–external management is on one side and assets are on the other. They’ve also come up with long-term management agreements with strict clauses, tying management to the assets. Recent examples have been NorthStar Realty and Ashford Prime.

Nevertheless, these two companies have not had successful separations. Both NorthStar and Ashford Prime saw their share price plummet and occupy the bottom position of the stock performance last month.

We all know it is a wild, wild world out there. As if that’s not enough, besides the drop, they’ve been the subject of activist attacks who are looking to close the gap between their NAV and the discounted share price.

Mr. Bond was very positive about the separation during the third quarter conference call. This is what he said during the call:

Former CEO

“We believe that separation would provide for a more focused and simplified structures that would be easier for investors to understand. We think that aligning each platform with sector specific shareholders is desirable and that we could achieve a cost of capital most appropriate to each entity by this alignment. We think that would allow us to allocate capital in a more focused way. We think this this idea allows for better alignment of currency exposure, each of the platforms are different investors.

Most importantly, I think we feel that this could potentially allow us to pursue individual growth and business opportunities for each of the separate entities. For instance, our investment management arm would have a greater ability to grow unconstrained by REIT status. We can also pursue individual inorganic growth strategy, strategic opportunities having a public currency that we could use for that.

So, I think the bottom line here is that this creates even stronger business that can pursue better growth opportunities as separate entities and create long-term value, and we look forward to posting you more in the future as that unfolds.”

If I were on the board right now, I would not pursue the split–very bad timing. Besides the NorthStar and Ashford bad examples, the market has been very volatile and big changes in this environment can go south quickly. The market can either say ‘we’re glad you did it’ or ‘what a bad idea, let’s sell off’.

The new CEO

Despite the dual nature and having become an REIT in 2012, W. P. Carey carries a good reputation in the market. It has been managing real estate for 40 years, its assets are net leased, and diversified. The portfolio is pretty much split among office, industrial, warehouse, and retail. Occupancy has reached 99%; it has been rated investment grade, and they have distributed dividends consistently since 1998.

With the share price drop, the dividend yield is now at 7.2% and the AFFO multiple has been around 11x. As for being diversified, it is more challenging to compare with its peers; but on the surface, it looks underpriced.

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.